Ask an Advisor: What Taxes Will My Daughter and Granddaughter Pay When They Inherit My IRA?

My daughter and granddaughter are my IRA beneficiaries. I understand they have to take all withdrawals within 10 years, but what are the tax implications? Will they have to pay inheritance AND income taxes on these withdrawals? – Linda

The tax treatment of inherited IRA withdrawals depends on both federal rules and, in some cases, state law, so the details can vary based on where you live. At the federal level, withdrawals from a traditional IRA are generally treated as ordinary income to the beneficiary, while Roth IRA distributions may be tax-free if the account meets holding requirements.

A financial advisor may help your beneficiaries plan withdrawals, manage tax exposure and align distributions with their broader financial goals.

Inheritance Tax on IRAs

First, let’s talk about the inheritance tax. It’s important to understand that this is entirely different from the estate tax. Perhaps because the two are often confused, many people believe there is a federal inheritance tax. However, that is not the case. No inheritance taxes are due unless you live in a state that imposes one.

Further, because the estate tax exemption is so high ($15 million in 2026), very few estates have an estate tax liability.

Your daughter and granddaughter may owe inheritance tax if you live in a state that has one. It does not matter where they live. Right now, only Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have an inheritance tax. Each state handles it differently, so you’ll need to refer to state law if you live in one of them. If you don’t live in one of these states, then there will be no inheritance tax.

(And if you need additional help understanding the tax implications of certain financial decisions, consider working with a financial advisor.)

Income Tax on IRA Withdrawals

Regardless of where you and your beneficiaries live, they will owe federal income tax on withdrawals if your IRA is a traditional IRA. The amount they pay will depend on their individual tax brackets, since these distributions are generally treated as ordinary income.

Additionally, depending on the state where your beneficiaries live (not where you live), they may also owe state income taxes on these withdrawals. Each state has its own rules, so the exact tax treatment will depend on that state’s tax code.

As you mentioned, most non-spouse beneficiaries are now subject to the 10-year rule under the SECURE Act. This means they must completely empty the inherited IRA within 10 years of your death. They can take withdrawals gradually over that time or wait until the final year, but the entire balance generally must be distributed by the end of the 10th year.

It can be more advantageous to take these withdrawals gradually rather than waiting to take a big distribution all at once, but everyone’s situation is unique. Also, if you are already taking RMDs at the time they inherit the account, they will need to take RMDs.

(If you need additional help managing an inherited account or making sense of these withdrawal rules, connect with a fin a ncial advisor and talk it over.)

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Using Roth Conversions to Reduce Taxes

If you’re interested in reducing the taxes your daughter and granddaughter will owe on the IRA they inherit from you, you may consider Roth conversions.

A Roth conversion involves transferring money from a traditional IRA into a Roth IRA. You’ll pay the income tax on that money when you do. The benefit is that once the funds are inside the Roth IRA, future withdrawals are generally tax-free.

This strategy can make sense if you expect your beneficiaries to be in higher tax brackets than you are. For example, say that you’re in the 12% bracket but they’re in the 24% bracket. By converting some of the IRA while you’re in a lower bracket, you would reduce the overall taxes paid on those retirement savings over time.

You don’t have to do it all at once. It often makes more sense to spread the conversion over a number of years to avoid a massive spike in income in any single year. However, you may want to review your specific situation with a financial advisor or tax expert for a closer look at your options. (And if you need help finding financial advice, this free tool can connect you with advisors who serve your area.)

Bottom Line

Yes, your daughter and granddaughter will owe income tax on the withdrawals they take from the inherited IRA, at least at the federal level. They may also owe income tax at the state level depending on where they live. If minimizing taxes for your beneficiaries is a priority, Roth conversions during your lifetime may help reduce the tax burden on the inherited account.

Estate Planning Tips

A financial advisor may help coordinate your estate plan with your broader financial strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Estate taxes, final expenses and outstanding debts can impact what heirs receive. Planning ahead by setting aside liquid assets or using tools like life insurance can help cover these costs without forcing the sale of long-term investments.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.